Let's Take a Closer Look at the Fundamentals of OXY

Oil & Gas Drilling company Occidental Petroleum is standing out today, surging to $64.09 and marking a 3.0% change. In comparison the S&P 500 moved only 0.0%. OXY is -5.64% below its average analyst target price of $67.92, which implies there is more upside for the stock.

As such, the average analyst rates it at buy. Over the last year, shares of Occidental Petroleum have offered a similar return to the S&P 500, moving 9.0%.

Occidental Petroleum Corporation, together with its subsidiaries, engages in the acquisition, exploration, and development of oil and gas properties in the United States, the Middle East, North Africa, and Latin America. The company is classified within the energy sector. The stock prices of energy companies are highly correlated with geopolitics: economic crisis, war, commodity prices, and politics all have an effect on the industry. For this reason, energy companies tend to have high volatility -— meaning large and frequent price swings. As global energy supplies shift towards renewables, we may see a reduced correlation between energy prices and geopolitical events.

Occidental Petroleum's trailing 12 month P/E ratio is 7.3, based on its trailing EPS of $8.75. The company has a forward P/E ratio of 13.6 according to its forward EPS of $4.72 -- which is an estimate of what its earnings will look like in the next quarter.

The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the energy sector has an average P/E ratio of 7.54, and the average for the S&P 500 is 15.97.

The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.

When we divide Occidental Petroleum's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of -0.95. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing OXY's growth potential .

To better understand the strength of Occidental Petroleum's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2023-02-27 37,095,000 -19,696,000 38.08 99.48
2022-02-24 26,314,000 -18,519,000 19.09 210.6
2021-02-26 16,261,000 -16,659,000 -17.26 -168.25
2020-02-28 21,750,000 -13,458,000 25.29 n/a
  • Average operating margins: 16.3 %
  • Average operating margins growth rate: 10.8 %
  • Coefficient of variability (lower numbers indicate less volatility): 145.6 %

Occidental Petroleum's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cashflow ($ k) YoY Growth (%)
2023-02-27 16,810,000 -4,497,000 21,307,000 60.15
2022-02-24 10,434,000 -2,870,000 13,304,000 104.99
2021-02-26 3,955,000 -2,535,000 6,490,000 -81.81
2020-02-28 7,375,000 -28,312,000 35,687,000 n/a
  • Average free cash flow: $19.2 Billion
  • Average free cash flown growth rate: -12.1 %
  • Coefficient of variability (lower numbers indicating more stability): 65.4 %

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in OXY have received an annualized dividend yield of 0.4% on their capital.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.

Occidental Petroleum's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 2, so the company's assets may be overvalued compared to the average P/B ratio of the Energy sector, which stands at 1.68 as of the first quarter of 2023.

Occidental Petroleum is by most measures fairly valued because it has a very low P/E ratio, an average P/B ratio, and generally positive cash flows with a downwards trend. The stock has mixed growth prospects because it has a a PEG ratio of less than 1 and weak operating margins with a positive growth rate. We hope you enjoyed this overview of OXY's fundamentals.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.